Thursday, September 22, 2011

I'm in the Wrong Business, Part 637: General Motors Contract Edition (GM)

We were able to make some money off the first bankruptcy and I believe we'll be able to reprise that experience.
Yesterday the stock closed at $21.28, down a bit from the $33.00 IPO price. It is down another 4% in late pre-market action.
From Reason's Hit&Run blog:

Well, that was fast. Last week I
wrote that the UAW would exhibit a streak of realism in its
quadrennial contract negotiations with the Big Three this time, if
for no other reason than it had no leverage (having lost its right
to strike during the bailout), no leg to stand on (having brought
the US automakers to the brink of bankruptcy) and was part-owner of
at least two of the companies (having accepted company stock in
lieu of cash for the health care trust fund for retirees). This
week, the details of the contract that the UAW just negotiated with
GM are seeping out and they prove that I couldn’t have been more
wrong.
The union asked for the moon—and pretty much got it.

The
deal will give each of GM’s 48,500 hourly workers: $5,000
bonuses just for signing the contract plus a profit-sharing payout
of at least $3,500 for this year plus additional bonuses if GM
meets its profit targets.
If this is not making you wish you were a senior GM worker,
consider
this: Workers will also get up to $2,000 for two hearing aids
every three years and $200 for a first wig in the event of
chemotherapy and “and up to $125 thereafter.”

GM’s rank-and-file workers are expected to ratify the contract
although they are not ecstatic about it because, evidently, they
still haven’t gotten back everything they “sacrificed” during the
bailout restructuring.

And what will GM get in exchange? It will no longer be on the
hook to offer automatic cost-of-living adjustments, although it
will have to give each worker $1,000 in “inflation protection”
every year for the duration of the contract. In addition, it will
be allowed to buyout older workers and replace up to 25 percent of
them with cheaper newer workers, something that will allegedly
allow it to lower its fixed labor costs. Oh, and that job bank that
paid laid off workers 90 percent or so of their wages for not
working, that’s truly gone. GM doesn’t have to reinstate that.

The deal is being hailed as a “win, win” for GM and the unions
and the auto industry in general. There is more than a touch of
hype in how much of victory the deal really is for GM, I suspect.
After all, every dollar GM has to give in bonuses and hair
prostheses to its workers is one dollar less it has for improving
its product line and grabbing market share from the Hyundais and
Kias of the world whose labor costs are still way lower than GM. Be
that as it may, there is no doubt that there is one party for which
this deal is definitely not a victory: Federal taxpayers.

They stand to lose $14 billion just on the principal if they
manage to sell their outstanding stock in GM for $43 a share or so.
But GM’s stock price has fallen about 50 cents since yesterday and
was hovering around $21.50 this afternoon after the details of the
deal became available—all of which suggests that at least so far
the market doesn’t think much of GM’s comeback strategy....

Mickey Kaus writes:

How about paying back the $15 billion first?
I’m sure there are sophisticated arguments for why the UAW
members shouldn’t pay back the taxpayers who bailed their employer out
of bankruptcy before they negotiate a deal that gives them each a $5,000 bonus. I just can’t think of them right now. … Just from a PR standpoint, repaying the debt would seem like a good idea.

Sure, as a going concern, GM has to pay to keep its employees from
bolting to a competitor. But what are the odds that most of GM’s UAW
workers (i.e, the ones not in the $14-an-hour Tier Two) could find jobs
anywhere near as good as the ones they now hold? Almost all their
leverage comes from the Wagner Act’s power to strike and not be fired.
Without Wagner, they’d be free to quit, which they would not do. (Go
ahead. Make GM’s day.)

It’s one thing to give workers power to negotiate above-market wages
through collective bargaining–hey, let them squeeze the bosses for all
the bosses can bear. It’s another thing when they squeeze more
than the bosses can bear, the bosses go broke, and ordinary citizens,
many poorer than UAW members, have to make up the difference. After that, why let the UAW continue to extract Wagner Act wages as if nothing happened? …

The $15 billion aside, if GM is so profitable it can afford to give its new hires a raise and all its UAW workers plush health benefits
and a big bonus, that’s great. But why do I fear the economic
assumptions underlying these numbers will prove to be unrealistic?...MORE